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Tuesday, August 30, 2016

CIMB Research downgrades Supermax to Hold

KUALA LUMPUR: CIMB Equities Research downgraded Supermax to Hold from Add with a lower target price of RM2.30 from RM2.70 earlier.

It said on Tuesday its target price was still based on 12 times CY17F price-to-earnings (P/E), in line with its five-year mean and -one standard deviation of the glove sector’s five-year mean).

“Although the stock is trading at a discount of 40.7% to the sector’s 5-year historical mean, we believe this was due to its inconsistent earnings and concerns about its future expansion.

“Given the capacity delivery concerns, we believe its risk-reward dynamics are now less positive. Downside/Upside risks are continuous delay in its expansion plans and stronger/weaker pricing competition,” it said.

CIMB Research said while Supermax's FY16 revenue rose 3.9% on-year, its net profit expanded a swifter 8.2% on-year to RM105.2mil.

Overall, the better on-year performance was mainly attributable to: i) ramp up of production at Plants 10 and 11, leading to increased output; ii) favourable environment in 2HCY15 (low latex prices and strong US$/RM); and iii) increasing operating efficiencies.

“However, the FY16 earnings were still below expectations, accounting for only 85% of our and 71% of consensus estimates,” it said.

The research house said Supermax’s weaker-than-expected 4QFY16 performance was mainly due to the sharp spike in the group’s tax rate to 80.3% (+64.7 percentage points).

It said the increase in tax payments were due to under-provisioning in previous quarters as well as a one-off payment of RM7.7mil in respect to previous years’ assessments (2007, 2009-11).

The ongoing industry-wide pricing competition and partial loss of production output at its Kapar plant also added to the 72.5% on-year decline in 4QFY16 earnings to RM6.8mil.

“We expect earnings to improve with the resumption of full production from the revamped lines at its Kapar plant. Furthermore, the group has started commercial production at 14 of the 20 lines in Plants 10 and 11.

“However, we understand that the current water supply is insufficient to run the remaining six lines though management is working closely with the authorities to secure more water supply. Hence, we are not inputting any output (1.7 billion pieces per annum) from the remaining six lines into our estimates for now.

“Given that the FY16 results were below expectations, we trim our earnings estimates by 14.7%-16.5% for FY17-18F after inputting: i) lower production capacity estimates, and ii) reduction in average selling prices (ASPs) given the competitive environment.

“We also introduce our FY19 estimates. We turn less positive on the stock due to concerns about the delivery of the remaining six lines at its Plants 10 & 11,” it added.